A bank's liabilities have an average duration of 2 years. Its assets have an average duration of 3.5 years. The bank's market value of equity is at risk if ________.

Question

Quizplus · Accepted Answer

The bank's market value of equity is at risk if interest rates rise. When interest rates rise, the value of long-term assets decreases more than the value of short-term liabilities. This can cause a negative gap, leading to a reduction in the bank's market value of equity.

A Bank's Liabilities Have an Average Duration of 2 Years